Column: Mexican drug cartels have become big business in the US

Mexican soldiers present Edgar "El Ponchis" Jimenez Lugo to the media in the city of Cuernavaca, Mexico, in this 2010 file photo. The teenage U.S. citizen who acknowledged being a drug-cartel killer has finished his three-year juvenile-offender term for homicide, kidnapping and drug and weapons possession. The interior secretary of southern Morelos state says the teen was released and taken to an airport Nov. 26 to be sent to the United States, where he has family.

You might think so for all the attention they get. As U.S. officials and commentators focus on events in Syria, Egypt and Iran, another violent struggle is taking place much closer to home. The rise of drug-trafficking organizations (DTOs) in Mexico has fueled crime on both sides of the border and has undermined the economy of an important trading partner of the United States.

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Since 2006, more than 60,000 people have been killed in DTO-related violence, and more than 26,000 have gone missing. The violence has spread from rural Mexico to major cities like Guadalajara and Mexico City, where, this May, armed men kidnapped 12 young people from a nightclub. The bodies of 10 of the abductees were later found in a mass grave outside the city; officials think they were killed as part of an ongoing war between rival drug gangs in the capital.

Despite enormous casualties, including members of U.S. law enforcement, the turmoil in Mexico does not receive nearly the level of scrutiny or attention from the U.S. government that conflicts in other countries do. During six hours of presidential debate in the 2012 campaign, for example, there was not a single direct mention of Mexico.

This is particularly puzzling given the close geographic, economic, and cultural ties between Mexico and the United States. The two countries share a 1,933-mile border that 350 million people cross legally each year, making it the world’s busiest. Mexico is the United States’ second-biggest export market and its third-largest import supplier. And a 2011 Gallup poll found that 84 percent of Americans think that what happens in Mexico is either “vitally important” or “important but not vital” to the United States — more than said the same about Afghanistan, Iran, or Pakistan.

The official U.S. neglect of the Mexican cartels is partly a function of the complex challenges they present. Violence connected with DTOs is no longer limited to northern Mexico but now reaches throughout the country. This expansion not only poses a foreign policy problem for Washington, but it also exacerbates several of the most intractable domestic issues facing the United States, including immigration reform and gun control.

A first step toward controlling the cartels would be to better understand how they function. The Mexican drug-trafficking organizations are a collection of criminal enterprises. Some, such as the Gulf cartel, have existed for decades; others, such as Los Gueros, are relative newcomers. Because of shifting alliances and breakaway cells, it is almost impossible to state definitively which cartels are in operation at any one time, and the extent of the crime, corruption, and instability associated with them has been difficult to quantify precisely. Without a clearer idea of what the DTOs are doing, the violence will only continue.

“The Cartels Are Focused on Drugs.”

Drugs are just the tip of the iceberg. In the popular U.S. television series Breaking Bad, about a high school teacher turned methamphetamine kingpin, there was an instructive exchange. When the show’s antihero, Walter White, was asked whether he “was in the meth business or the money business,” he replied, “I’m in the empire business.”

The same can be said of the DTOs, which are independent and competing entities — not an association like OPEC. The sale of cocaine, heroin, marijuana and meth remains extremely profitable. The U.S. Justice Department has put the cartels’ U.S. drug trade at $39 billion annually. But the DTOs have diversified their business considerably, both to increase their profits and to exclude rivals from new sources of revenue. For example, they are dealing increasingly in pirated intellectual property, like counterfeit software, CDs, and DVDs. The most destructive new “product,” however, is people. The cartels have built a multibillion-dollar business in human trafficking, including the shipment of both illegal immigrants and sex workers.

What the DTOs are really selling is logistics, much like Wal-Mart and Amazon.com. Wal-Mart was one of the first retailers to run its own fleet of trucks, providing tailored shipping at a lower cost that in turn gave the company an edge over its competitors. Similarly, Amazon may have started as a bookseller, but its dominance, as Fast Company put it, is “now less about what it sells than how it sells,” providing a distribution hub for all sorts of products. Drug-trafficking organizations are using the same philosophy to cut costs, better control distribution, and develop new sources of revenue.

The one element of the U.S.-Mexico relationship that has received no shortage of attention is the border, yet the technology and money dedicated to enhancing security there have not been enough to thwart creative DTOs. The Sinaloa cartel, for example, has an extensive network of expertly constructed tunnels under the border, some featuring air-conditioning. (The workers who build the tunnels are frequently executed after the work is completed.) At the other extreme, traffickers have used catapults to launch deliveries from Mexico into the United States.

Logistics, then, are the DTOs’ main source of revenue, and illegal drugs are but one of the products they offer. As the cartels’ revenue streams become increasingly diversified, the drug trade will become less and less important. In fact, the prospect of the DTOs’ selling their services to terrorists, say by transporting weapons of mass destruction across the U.S.-Mexico border, has begun to frighten analysts both inside and outside government.

“But the Violence Is Unique to the Drug Trade.”

No. The most brutal DTO battles are not over customers or suppliers but over ports and trade routes. The Mexican state of Michoacán, with its large Pacific port of Lázaro Cárdenas, has suffered a surge in violence as the remnants of La Familia Michoacana and the rising Los Caballeros Templarios fight for dominance. This May, Los Caballeros Templarios ambushed and shot 10 farmers after they met with government officials to protest cartel extortion. As one farmer described the DTO, “It’s like a monster with a thousand arms.”

Brutality on Mexico’s borders is also largely a function of logistics, or so the pattern would suggest. On the U.S.-Mexico border, for instance, the city of Nuevo Laredo has been racked by violence for over a decade. Not coincidentally, the city’s northern edge lies less than a mile from Interstate 35, a north-south highway running through Dallas, Kansas City, and Minneapolis and connecting to major east-west routes. Mexico’s southern border has also seen a spike in violent crime, as the cartels move their products — guns, cocaine from Colombia, and immigrants from Central America — north to the United States.

Cartels also use violence to further less concrete objectives. Spectacular acts, such as rolling severed heads onto a nightclub dance floor (as La Familia Michoacana did in 2006), are designed to shock and frighten, not to move product or attract customers. Assassinating the family of a Mexican marine who had participated (and been killed) in a raid against a DTO, as happened in late 2009, was an unambiguous threat against all law enforcement personnel. And the DTOs regularly threaten and kill reporters — Mexico is the fourth most dangerous nation in the world for journalists (behind only Syria, Somalia, and Pakistan), according to Reporters Without Borders — both to prevent the release of specific information about cartel activities and to discourage reporting on them in the first place. A recent narcomanta (“drug banner”) posted over two bodies hanging from a highway overpass in Nuevo Laredo sent a clear message: “This is going to happen to all of those posting funny things on the Internet.… I’m about to get you.”

Violence, in other words, is not a function of the drug trade specifically. It is how the cartels manage everything from marketing to public relations to human resources.

“At Least the Violence Is Contained to Mexico.”

Not at all. This past February, the Chicago Crime Commission named Joaquín “El Chapo” Guzmán Loera, the leader of the powerful Sinaloa cartel, “Public Enemy No. 1? — the first person to receive the designation since Al Capone. The number of homicides in Chicago through early September 2013 was 27 percent higher than in New York, and its murder rate was 49 percent higher than Los Angeles’s. Jack Riley, head of the U.S. Drug Enforcement Administration’s Chicago office, has ascribed the city’s unusually high murder rate to drug-related turf wars sparked by Sinaloa’s growing presence in the city. The centrality of Chicago to air, rail, and road transportation networks, as well as the city’s large Mexican immigrant community, make it an important node for drug distribution.

Despite what’s happening in Chicago and other U.S. cities, there has been almost no appetite at the federal level for tracking the effects of the DTOs on domestic crime. Proponents of immigration reform have no wish to promote stereotypes of immigrants as dangerous criminals. Advocates for higher and longer border fencing acknowledge the danger but prioritize major cities and more populated areas, failing to realize that this tactic simply shifts cartel operations to remoter areas that are harder to control. Governors of states that border Mexico have little interest in drawing attention to crime that results from their inability to contain the DTOs. And Washington does not want to antagonize the Mexican government over its law enforcement shortcomings, particularly given that Mexico’s cooperation is critical to addressing a host of other issues, such as immigration.

While Washington looks the other way, cartel activity in the United States is only getting worse. To keep their operations going, the DTOs have been engaging in money laundering and bribery on both sides of the border. In September 2013, for example, a federal jury in Austin, Texas, sentenced three men involved in laundering Los Zetas money in the United States — including a brother of the cartel’s notorious leader — to lengthy prison sentences.

The DTOs’ reach is extending ever farther into the United States. Like many successful legal businesses, the cartels are vertically integrating. Instead of merely selling meth, for example, DTOs like Sinaloa now manufacture the drug using chemical precursors they import from Asia. This, alongside new laws that have made it harder to acquire precursors in the United States, has driven “mom and pop” meth producers in the United States out of business, as they cannot compete on price or quality with the product from Mexico. The integration goes down the supply chain as well. Part of the reason that Chicago law enforcement officials are so alarmed by El Chapo is that Sinaloa no longer outsources its retailing to local dealers but is taking an ever more active role in selling the product in the United States. And that means that cartel-related crime is only going to get worse.

“The Problem Is the War on Drugs.

Legalization Would Help.”

Hardly. Legalization has become an increasingly popular, if still controversial, proposal among those who think that the costs of the war on drugs have overwhelmed the benefits, including some Central and South American leaders, like Guatemalan President Otto Pérez Molina. But because DTOs are dealing in far more than just illegal drugs, the disappearance of one revenue stream would not eradicate the cartels or decisively erode their power.

Even if the cartels were dependent on drug money, which they aren’t, the idea that legalization is a binary switch that would cut off profits from the drug trade is fundamentally flawed. In the context of drugs like marijuana, “legalization” implies wide availability and fairly easy access, but it is highly unlikely that the U.S. government would remove all, or even many, restrictions on drugs like ecstasy or heroin, leaving the cartels’ business in those narcotics intact.

What’s more, even legitimate drugs can spur illicit trade if they are in high demand but the supply is tightly controlled. Drugs like oxycodone, a highly addictive painkiller, are legally manufactured and sold in the United States, but “oxy” is strictly regulated under Schedule II of the 1970 Controlled Substances Act. Those restrictions gave rise to a thriving black market in the drug, with prices reaching as high as $150 per pill.

Licit drugs can also create highly profitable arbitrage opportunities for enterprising criminals if the laws that govern their distribution differ from state to state, as would likely be the case if marijuana or other drugs were widely legalized. Cigarettes are legal, yet interstate cigarette smuggling makes a great deal of money for organized crime; because of differing state tax rates, the opportunity for profit is substantial. Virginia, for example, which has among the lowest cigarette taxes in the nation, is grappling with increased criminal activity, because of trafficking to high-tax states like New York and New Jersey. (And Virginia’s hardly the only one; other states, like Texas, have even seen armed hijackings of cigarette trucks.)

“Decapitating the Cartels

Will Render Them Powerless.”

Nope. Much has been made of the capture this July of Miguel Treviño Morales, alias “Z-40,” the leader of Los Zetas. U.S. President Barack Obama and Mexican President Enrique Peña Nieto praised the capture as a major milestone in the fight to dismantle the cartels. But although capturing or killing drug lords makes for dramatic news stories, a “decapitation” strategy ignores crucial aspects of the DTOs’ success.

Assassinating kingpins often leads simply to martyrdom and glorification; the commemoration of cartel leaders through shrines and narcocorridos (“drug ballads”) is already widespread. Decapitation can also increase violence, at least in the short to medium term, as wars of succession engulf not only the cartel itself, but also law enforcement personnel and civilians, as well as members of rival organizations. Furthermore, under pressure to prove they are still powerful, decapitated cartels may lash out in dramatic displays of violence.

The capture and imprisonment of DTO leaders, particularly in Mexico, has proved to be of limited utility. The men who control these organizations have a well-established capacity for brutality and the ability to rise to the top of a large criminal enterprise without being killed. These qualities make them formidable and, in many cases, help them to operate their businesses from prison. The ability to bribe or intimidate prison guards, for example, can win an inmate the freedom to communicate with the outside world.

What’s more, prisons in both Mexico and the United States have proved fertile ground for recruitment and training. The Barrio Azteca gang, an enforcement arm of the Juárez cartel, formed in the Texas prison system. The most notorious gang in the United States is Mara Salvatrucha, more widely known as MS-13. It originated in Los Angeles, including in its prisons, before spreading across the United States and into Mexico and Central America. The scope and capabilities of MS-13 have now caught the attention of both Los Zetas and Sinaloa, which have taken steps to ally with a potentially dangerous rival.

Then there’s the embarrassing fact that the most famous case of DTO decapitation is also the strategy’s most obvious failure. In 1993, U.S. and Mexican officials expected that the capture and incarceration of El Chapo, Sinaloa’s leader, would be a punishing blow to the increasingly powerful crime network. If anything, the opposite occurred. With the help of compliant prison guards, El Chapo arranged his own escape in 2001 from Puente Grande prison, the Mexican equivalent of an American supermax facility. He has evaded rearrest for more than 12 years, and in 2009, Forbes named him one of the world’s billionaires. Although he was dropped from the list this year, Forbes stated, “As the leader of the Sinaloa cartel, he is one of the most powerful people in the world.”

“We Need to Hit Them Where It Hurts: the Wallet.”

Exactly. Despite the ongoing arguments about drug legalization and border security, the most effective way to combat the scourge of the DTOs would be to interdict not drugs or people but money. As in any business, money is the fuel that keeps the cartels running.

Even if Sinaloa, to give only one example, were to disappear tomorrow, other organizations would quickly rise to take its slice of the lucrative pie. One of the most basic tenets of business is that highly profitable markets attract lots of new entrants. This is true for legal and illegal enterprises alike. The staggering profits of illegal trade would be much less attractive if the DTOs could not launder, deposit and ultimately spend their money.

But shutting down the cartels’ financial operations will be a formidable task, given the help they have had from multinational financial institutions, which have profited from the cartels’ large-dollar deposits. In 2010, Wachovia bank (which was acquired by Wells Fargo in 2008) admitted that it had processed $378 billion of currency exchanges in Mexico — an amount equal to about one-third of the country’s GDP — to which it had failed to apply anti-laundering restrictions. In 2012, British bank HSBC settled with the U.S. government for $1.9 billion to escape prosecution for, among other things, laundering hundreds of millions of dollars for the Sinaloa cartel. U.S. law enforcement has also implicated Bank of America and Western Union in DTO money laundering. Although illegal money transfers can happen without banks’ knowledge, the volume and widespread occurrence of these transactions indicate just how easy it is for the cartels to clean their dirty money.

Paying a fine to avoid prosecution is almost no punishment at all. The fines Wachovia paid amounted to less than 2 percent of its 2009 profit. Even the record fine assessed on HSBC amounted to only 12 percent of the bank’s profits. Furthermore, banks can simply accrue funds to offset any possible fines, either by increasing what they charge cartels or by setting aside some of the earnings from laundering, even as they continue to do business with the DTOs. Prosecuting bank employees involved in money laundering, up through the highest levels of an institution, would be a better tack. Pictures of a chief compliance officer as he entered a courtroom for sentencing would have a far greater deterrent effect than any financial penalty.

To that end, investigative techniques and legal precedents for going after global criminal networks are increasingly robust, and the political payoffs could be substantial. One of the more successful campaigns in the war on terrorism has been the financial one; experience gained in tracking the funds of al Qaeda could make it easier to similarly unravel Los Zetas’ financing. Malfeasance in the financial industry is nothing new, but public sensitivity to banks’ wrongdoing is arguably higher than it has been in decades. An enterprising prosecutor could make quite a reputation for herself by tracking DTO money through the financial system.

The cartels, along with the violence and corruption they perpetrate, are threats to both Mexico and the United States. The problem is a complicated one and taps areas of profound policy disagreement. The way to make progress in combating the DTOs is to ignore issues like gun control and illegal immigration and follow the money. Stanching the cartels’ profits will do more to end the bloodshed than any new fence or law.

Evelyn Krache Morris is an International Security Program fellow at the Belfer Center for Science and International Affairs at the John F. Kennedy School of Government, Harvard University.